Limiting Professional Liability through the Professional Services Agreement

The importance of the written agreement between the professional and his or her client cannot be overstated. A written agreement will define the duties and responsibilities of the parties, allocate risk and reward for a particular project or engagement, and govern how disputes are resolved. In some cases, written agreements are required by insurance companies or by law. Despite this, written agreements and their critical terms are often afterthoughts for professionals, who are typically and understandably more focused on the performance of their work. A well-crafted agreement, however, is equally crucial. The following are some tips for an effective written agreement which can help limit a professional’s exposure to potential liability.

The Parties. Properly identifying the client, while seemingly obvious, is often given too little consideration. Even in the case of a simple payment dispute where a claim is ultimately required to recover fees owed on a project, it is important to correctly identify whether the signatory to the agreement signed on behalf of a corporate entity or on behalf of himself as an individual. Ambiguities can create roadblocks to recovery.

In the case of accountants, it is particularly important to clarify early on the identity of the client. For example, when dealing with corporations, LLCs, or partnerships, a single individual is typically tasked with communicating with the professional, and, frequently, the initial engagement morphs into requests for advice regarding that particular individual’s stake in the company or partnership, potentially leading to conflicts and other disputes.

The agreement should also contain a provision excluding third-party beneficiaries, meaning no one other than the client can bring a claim against the professional to enforce the terms of the agreement. It is not uncommon for members of the public, or other contractors on a project, to seek recovery from professionals by claiming they are a third party beneficiary of the professional services agreement. Expressly excluding third-party beneficiaries can help prevent such claims or lead to quick resolutions.

Scopeof Work. The scope of work provision setting forth the specific services to be provided by the professional in the engagement or project is perhaps the most important provision in the agreement, both in defining and limiting the consultant’s responsibilities as well as identifying the work for which the professional will be paid. The scope of work provision should be as specific as possible and list the precise tasks to be performed by the professional. General descriptions such as “Consultant will provide all necessary services” or “complete services” should absolutely be avoided as they invite arguments that virtually any conceivable task should have been performed by the professional.

Specific exclusions from the scope of services to be provided should also be listed if necessary. For architects and engineers, this means expressly excluding project management services (or similar phrases such as administration, construction administration, or project management), unless expressly agreed to by the professional (and an additional fee negotiated in exchange for the commensurate additional liability exposure).

Highlighting the importance of a well-defined scope of work provision, the California Supreme Court in the recent case Beacon Residential Community Assn. v. Skidmore Owings & Merrill LLP found that the plaintiff homeowners association (HOA) sufficiently alleged facts showing that the project architect for the development owed the HOA and its members a duty of care, even though the architect only had a written agreement with the project developer and not the subsequent home purchasers. One of the main factors the court focused on was the architect’s active role in the project, which included weekly inspections, monitoring contractor compliance with design plans, altering design requirements as needed, and advising the owner of nonconforming work. Thus, design professionals considering taking on broader project roles should be aware of the potential implications for doing so and carefully consider the risks and benefits, as well as ensure the scope of work set forth in its professional services agreement is no greater than the responsibility and risk intended to be assumed.

Professional services agreements should also expressly disclaim any fiduciary relationship of the parties. A fiduciary relationship is one of utmost trust and loyalty, and subjects the professional to a heightened duty of care toward the client. This can result in outsized and potentially disastrous damage awards against the professional, as happened in the case of City of Victorville v. Carter & Burgess, Riverside County Superior Court Case No. RIC503565 (Riverside County jury award of $52.1 million against an engineering firm after the city successfully argued the existence of a fiduciary duty between the firm and the city). Express disclaimers of fiduciary responsibilities and the avoidance of language referring to “trust and confidence” go a long way toward protecting against this type of result.

Limitation of Liability Provisions. A limitation of liability provision proves to be one of the most effective ways a professional can limit potential exposure to liability. Such provisions typically limit potential liability to either a fixed amount or the amount of fees on the engagement, whichever is greater. California courts have held that such provisions are enforceable, but that they will be strictly construed, meaning they will not limit liability for claims or damages outside of what is specifically stated in the provision. (Markborough Cal., Inc. v. Superior Court (1991) 227 Cal.App.3d 705.) While clients are often resistant to these provisions, explaining the inequity of allocating most, if not all, of the risk to a professional consultant in exchange for a (relatively) small fee can be helpful in securing at least some form of limitation of liability into an agreement. Another strategy is to provide the client with alternate proposals – a lower fee with a limitation of liability provision included and a higher one without it. As a fallback position, the professional can propose that liability be limited to the amount of insurance coverage available at the time of resolution or judgment.

Use of the Services Proposal. Frequently, a professional’s initial proposal to the client is incorporated into a final agreement or, occasionally, signed by the client as the only written agreement between the parties. For that reason, the professional should approach the preparation of its proposal as though it will become the parties’ agreement and include in its proposal all of the specific terms and conditions it would want included, including its specific scope of work and any applicable disclaimers, exculpatory provisions, and limitations of liability.

Final Practice Pointer. Most professionals are very busy perfecting their trade and satisfying their hard-won clients. As a result, there is often little time to devote to drafting and negotiating service agreements. As highlighted above, the small investment of time and effort spent in creating an effective agreement up front, and judiciously reviewing clients’ proposed agreements, will pay dividends in the long run in protecting the professional against unanticipated and costly liabilities. Our firm is happy to assist with any needs you may have in this regard.